The problems that the eurozone is facing are all of its own making. Not only did the common currency deprive European nations of the ability to adjust to economic shocks, the euro was itself the shock to which it could not respond. Countries on the periphery had access to cheaper credit than they had experienced in living memory, contributing to fiscal imbalances and growing public debt. The current crisis has shown the impracticability of an economic and monetary union in Europe without the essential institutions of a banking or financial union. As the recent cases of Spain and Cyprus already indicate, a banking union will draw on the widespread political reluctance to support euro area bailouts for banks. Electorates in Europe will find it even more difficult to bail out a foreign bank, so we may well expect that a common resolution regime will rest on the “bailing in” of bank creditors. The feedback loop linking banks and states is not broken from above, but from below, by imposing losses on investors and unsecured bank creditors.
